Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History by Liam Vaughan
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BINOD’S RATING: 7/10CAN A SOLITARY TRADER BRING GLOBAL MARKETS TO THEIR KNEES?
A real-life financial thriller, Flash Crash uncovers the remarkable, behind-the-scenes narrative of a mystifying market crash, a globe-spanning investigation into international fraud, and a man at the center of them both.
The unlikely character—a finance whiz, social misfit, brazen cheater, folk hero and fraud victim.
His name is Navinder Singh Sarao aka Nav aka the “Hound of Hounslow”. That’s what the newspapers called the then-36-year-old when police turned up at his parents’ home near Heathrow in 2015 and arrested him.
Key points
On 6 May 2010 the eurozone crisis was tearing through the continent. Greece was bankrupt, and it looked as though Spain or Italy could be next. Markets were on edge, volatility was high — and then something very strange happened.
The S&P 500 began to crash, much more than ever before, losing 5 % of its value in four minutes. The shock spread to the Dow Jones, which plummeted downwards. Financial markets across the globe were going haywire. Oil crashed. Shares formerly valued at $50 were suddenly trading at 0.0001 cents while others soared. In less than half an hour, trillions of dollars had been wiped off global markets. Then, suddenly, it all went back to normal.
It came to be known as ‘the Flash Crash’. But what had happened? Who was responsible?
Totally bizarre as it sounds, it transpired that a single man, working from the edge of his bed in his parents' house in Hounslow outside London, was manipulating the markets, abusing the system until it broke.
One of the strategies he used was ‘spoofing’, where a trader places a large batch of orders to buy a specific futures contract, which creates the impression that demand for that asset is increasing. Other traders see this and begin to buy, which causes the price to move up. The ‘spoofing’ trader, having made the market move in the direction he wanted, quickly cancels his original batch of orders they were just a decoy and then carries out the transactions he intended all along. That’s what Nav was doing and it was making him a fortune. Unfortunately, it was completely illegal.
“Financial markets are not what most people think. Now it’s all done by computer, meaning that anybody with a connection and some money behind them can, in theory, play the global markets”
The target of Nav’s spoofs and the object of his professional frustration, were the High Frequency Traders (HFTs). These are firms that use high-speed computer programs to carry out their transactions. They also have agreements with exchanges to gain access to market information fractions of a second before everyone else. These pluses allow HFTs to exploit market information that is available only to them, which can yield massive financial rewards. Nav saw this as cheating. These big boys were using their political connections and technological advantages to stuff everyone else! He wanted payback.
Nav then actually tweaked his trading software to “stack” his orders at the back of their price point, and any time the market traded close by, the software would cancel his orders. So, he never had to buy.
The effect was huge! As Vaughn writes: "By any measure, NAVSAR was an outlier. In the twelve days the CFTC ended up selecting to illustrate the entity’s activity, its layering algorithm canceled or modified orders 182,000 times, corresponding to $35 trillion in notional trades—double the size of America’s gross domestic product. On eight of those days, not even one of those orders was hit. The size of the orders was also immense: an average of 504 contracts, where the average across the market was seven."
Four years after the event, after every US agency had its crack, a trader looked at the record and proved everyone - including himself - wrong. “I got pretty obsessed,” he (still known as Mr. X today) says. “Based on the data I guessed it had to be the work of a large prop trading firm, maybe with an internal clearing arm to shield it from the authorities. The scale and the audacity of the behavior were so massive I couldn’t imagine it was one individual. As it turned out I was very wrong.” He became a whistleblower, reopening the case just before the statute of limitations kicked in, and that led to Sarao and an international effort to bring him to justice.
Funnily, Sarao never thought he did anything wrong. He thought of himself as a victim of HFT algorithms. He proudly videoed his screen while trading (providing hours of fascinating insights for investigators who seized his computer). All these attitudes, approaches, tactics and sheer thoughtlessness, along with crudeness, rudeness and total lack of respect for anyone he dealt with, led to a diagnosis of Aspberger's, once he was in custody. It made some sense. His math skills were awesome, his instincts spot on, and his reaction time lightning quick. He was a fearless trader, but a failing human being.
In January 2020, after this book was completed and after the US authorities were finally finished with Sarao as a co-operating source, the court finally sentenced him - to two years at home.
Bizarrely, Nav wasn't in it for the wealth. He lived at home, preferred tracksuits to designer clothes, had an ordinary computer, drove a moped, and let no one know what he was doing. His parents, one ill and one working a counter in a store, never knew what he did all day. They had no clue he had made up to $ 100 million from his childhood bedroom. Even more bizarrely, he proceeded to lose it all on Ponzi schemes and shady con men, and when he was caught, he couldn't make bail or pay lawyers.
“The book is also an engaging history lesson on the evolution of modern trading, the conflicting demands it seeks to serve, and its dislocation from any social purpose”
What I liked
Fast-paced, richly detailed financial thriller
Liam Vaughan’s clear explanations are one of the things that make the book so compelling
Extremely well-researched
Vaughan achieves something remarkable. He makes you sympathise with a trader who on a good day cleared $ 1 million!
The lessons
One big lesson from the book is that far too much energy goes into prosecuting such small fry like Nav. The real bandits are still out there, cloaked in political cover and respectability yet rigging the markets big time. Poor Nav just wanted a level playing field, but they wouldn't give it to him, allowing his competitors to engage in spoofing when he was told to "stop it". A question raised by the book is whether Nav had really done anything wrong. When the US investigators interviewed executives from HFT firms, they began to have their doubts:
“After meeting a particularly obnoxious young multimillionaire, who greeted them in his palatial, high-rise office wearing flip-flops and a Hawaiian shirt, one investigator joked: ‘So, these are our victims?’
It’s also a lesson on the risks and returns of trading. Trading is like surfing. When markets are calm, gently ebbing this way and that, there’s not much money to be made. Occasionally, with the onset of a global financial crisis, say, or the arrival of a pandemic, a tidal wave comes along, wiping out masses of unsuspecting traders. It is during such times that trading legends are born.
Conclusion
Depending on whom you ask, Nav was a scourge, a symbol of a financial system run horribly amok, or a folk hero who took on the tyranny of Wall Street and the high-frequency traders.